Sports Team Valuations: Why Private Equity is Buying Franchises
In August 2024, the National Football League approved a change to the rules surrounding ownership of their franchises. For the first time, private equity firms would be permitted to purchase stakes in NFL teams, following in the footsteps of the other Big 4 leagues in North America, such as the NBA, NHL, and MLB. Over the course of the last decade, the valuations of sports teams have skyrocketed. In fact, each WNBA franchise increased in value by an average of 180% over the past year. Even long-standing NFL teams that are already pushing past $10 billion in valuations have seen positive growth, year after year. These financial factors have set the stage for private equity firms looking for alternative investments. Leagues are finally opening the door by loosening regulations, long-term media deals are being viewed as a long-term revenue stream, and new areas for revenue diversification are developing quickly.
Given sports services deal activity reached $31.64 billion in 2024, what changed over the last decade to allow private equity firms to get a foothold in the sports franchise landscape?
Allowing Private Equity In
Before the NFL made their decision in August, private equity had already played increasing roles in other leagues. One of the key concerns that leagues had was the early exit timelines of typical PE firms. Since leagues expect longer ownership timeframes, regulations were created. An example of this is in the MLB. Since 2019, a single private fund was allowed to hold a minimum of 2.5% to a maximum of 15% of a franchise, with a minimum holding period of five years.
When taking a closer look at a previous case of private equity in European professional football, the main catalyst for the rush of private investment in sports teams was COVID-19, which gutted the main revenue source of ticket sales for many clubs. Looking at the results, private equity alleviated much of the financial burden that felt insurmountable without the injection of cash flow. For example, several of these clubs used the PE funds and guidance to invest in alternative revenue streams, such as stadium renovations. Although these teams cited reduced flexibility when working with private equity firms, an examination of their financial metrics revealed increases in both revenue and EBITDA, prominent indicators of investment return.
The exponential growth of sports teams valuations has led to the loosening of regulations across major sports leagues. One private equity firm in particular has made sports franchises a focus. Arctos is a private equity firm which specializes in purchasing minority stakes across a wide range of sports. Their holdings include the Minnesota Wild (NHL), the Chicago Cubs (MLB), and the Golden State Warriors (NBA). For many of these private equity firms, sport teams represent the perfect alternative investment.
Media Rights
For a private equity firm, cash flow predictability is key to defining long-term success. Lenders prefer stable sources of cash flow that are furthest removed from the uncertainties of the market. Increasingly, sports teams are able to offer the consistent cash flow that appeals to private equity firms. For example, looking at the revenue breakdown in the NBA, 41 per cent is from national revenue (largely made up of national TV rights). Although ticket sales may be affected from unforeseen circumstances (such as COVID-19), media rights are a juggernaut. In fact, the NBA’s new 11-year media deal, beginning in 2025-26, increases the league’s media revenue by 160 per cent. This type of revenue is contractually guaranteed for a large period of time, making investment in these leagues increasingly secure. Media valuations have exploded in value in recent years due to the rise of streaming services. Nowadays, sports rights are one of the biggest assets in entertainment, and both the streaming giants and traditional networks are bidding it up to get in on the action. Unlike technology companies, which may hold a certain amount of risk with their growth potential, sports franchises minimize this risk with these lucrative long-term media contracts.
Revenue Diversification and Real Estate
In the past, the main business model for sports teams revolved around the ticket and merchandise model. However, there is further potential for revenue diversification when looking at real estate. The biggest example of turning real estate and stadiums into pivotal parts of the franchise’s valuation is SoFi Stadium, home to the Los Angeles Rams. It is a sprawling $5 billion complex including retail, hotels, offices, and residential units. Elsewhere, New York Mets ownership are also looking at building an $8 billion casino complex at Citi Field. When stadiums are not being used, the real estate they sit on is not being utilized to its maximum potential, since teams do not play year-round. These superstadiums allow ownership to capture real estate appreciation along with rental income even when teams are not playing.
In private equity, store-of-value, which is an asset’s ability to maintain its purchasing power over time without deteriorating, is held in high regard. For these firms, real estate is the perfect store-of-value to complement the sports franchises whose growth lifts everything around it. Looking past real estate, areas such as tickets and concessions make up a significant chunk of sports teams valuations and profits. These sources of income rise with inflation. The price of tickets and the price of popcorn at a baseball game will naturally hedge against inflationary concerns, making it attractive to firms looking to diversify their revenue.
What’s Next?
Sports franchises are a new and exciting asset class with certain aspects that are difficult to find anywhere else, in terms of scarcity, cash flow predictability, and inflation-resistant revenue. This is the reason why funds are going out of their way to invest in them. The fast rise of private equity in sports is not a shift that is immediately visible to the end consumers of this product. For now, it does not significantly affect the on-court or the on-ice product that ticketholders flock to see. This may be due to the fact that there are regulations present limiting private equity to minority stakes. As franchise valuations continue to climb, leagues may find little choice but to raise ownership caps on PE firms, allowing them to purchase larger shares. The question is whether fans of sports teams who care deeply about each season’s performance can accept private equity’s long-term vision for the game, whether that be a five, seven, or even a ten-year exit timeline.